Outward Foreign Direct Investment and Transmission of U.S.Monetary Policy Uncertainty:From the Perspective of Innovation Behavior
The main driver of the global financial cycle is U.S.monetary policy,and the international transmission of U.S.monetary policy has led to the fluctuation of macro economy and financial turbulence.The first-order impact of U.S.monetary policy has been widely studied.However,less research has focused on the second-order impact,that is,the international transmission of U.S.monetary policy uncertainty.As the frequent occurrence of U.S.monetary policy uncertainty shocks,how do Chinese firms manage risks,seize opportunities,and adjust their innovation behaviors in response to these shocks?The impact of the policy uncertainty on firm innovation remains controversial,with no consensus reached.It is of great theoretical and practical significance to clarify the relationship between U.S.monetary policy uncertainty and innovation behavior of Chinese firms.Under the global financial cycle,the trilemma evolves into a dilemma,where the spillover effects of U.S.monetary policy uncertainty depend on the degree of capital controls.Utilizing the capital account openness indicator developed by Chinn and Ito(2006),this paper finds that China's level of capital account openness is significantly lower than the world average,while the host countries of Chinese OFDI firms'overseas subsidiaries exhibit notably higher levels of capital account openness than China.This disparity suggests that OFDI firms are directly influenced by monetary policy shocks from developed countries,which may serve as a crucial mechanism for the international transmission of monetary policy.Based on firm-level OFDI data,this paper uses the unexpected changes in monetary policy uncertainty caused by the Federal Open Market Committee(FOMC)meeting for causality identification.The results are as follows.Firstly,the U.S.monetary policy uncertainty shocks can be transmitted through OFDI firms'overseas production networks to OFDI firms,whose innovation inputs and innovation outputs increase with uncertainty.Secondly,the lower level of capital controls in the destination countries of OFDI firms leads to the greater spillover effects of U.S.monetary policy uncertainty shocks on these firms.Moreover,among the real option channel and growth option channel,the growth option channel dominates.Thirdly,the primary source of innovation funding for OFDI firms stems from financial asset allocation.The paper finds the need for a comprehensive evaluation of the spillover effects of uncertainty,considering the varied impacts of policy uncertainty on different economic activities.Meanwhile.it highlights the importance of further deepening financial market reforms to support innovation by ensuring a robust financial asset buffer for firms.The main contributions are as follows.Firstly,this paper complements the channels of monetary policy spillovers from developed countries from the perspective of OFDI firms.Second,it provides new evidence of the impact of U.S.monetary policy on the real economy.Unlike existing literature that focuses on the influence of U.S.monetary policy on financial markets,this paper focuses on the international transmission of second-order shocks of U.S.monetary policy and analyzes the impact of this transmission on the innovation behavior of Chinese firms.Third,it enriches research on the relationship between policy uncertainty and firm innovation.This paper offers new evidence on how U.S.monetary policy uncertainty shocks promote innovation of Chinese firms.
international transmission of monetary policyuncertaintyOFDI firmsinnovation
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